INVESTING WITH

William J. Stromberg -- T. Rowe Price Dividend Growth Fund

By JULIETTE FAIRLEY

Published: September 1, 1996

WHEN William J. Stromberg studies a stock for his growth-and-income fund at T. Rowe Price, he is not looking for growth at any price or even for high income. What interests him are ''growth at a reasonable price'' and a dividend with the potential to rise. It is all the better if the stock is cheap and the company has some extra cash in its coffers, ready for a possible acquisition.

Mr. Stromberg's strategy for the 3 1/2-year-old T. Rowe Price Dividend Growth fund is to buy companies whose earnings and dividends he expects to rise consistently. And he tries to buy the stocks when they are out of favor for a temporary reason. ''The art is figuring out which ones are only down temporarily, and that's where judgment comes in,'' he said. ''In particular, we look for companies whose relative dividend yield is unusually high.''

Currently, the fund's average dividend yield -- the amount paid on each share divided by the share price -- is 2.3 percent, compared with an average of 2.2 percent for the Standard & Poor's 500. Mr. Stromberg looks for companies with dividend yields at two-thirds of the market yield or higher.

Matt Muehlbauer, research manager of the Value Line Mutual Fund Survey, says the $113 million, no-load fund has done quite well since its inception in December 1992 through July. On an annualized average basis, the fund gained 16 percent, while the typical growth-and-income fund gained 11.9 percent, he said. ''It's not quite as volatile as a typical growth-and-income fund, and it has a respectable yield.''

Data from Morningstar Inc., the Chicago researchers, show that for the three years through Thursday the fund has an annualized return of 15.7 percent, versus 13.4 percent for the average growth-and-income fund. Kevin Kresnicka, a Morningstar analyst, described Mr. Stromberg as more value- than growth-oriented. ''He's looking for companies that can grow,'' Mr. Kresnicka said, ''but he's not going to buy that dividend at an outrageous price.''

Mr. Stromberg calls his approach ''garp'' investing, for growth at a reasonable price. And what is reasonable? For a growth company, he looks for its price-to-earnings ratio to be about the same as its projected percentage growth rate. The average price-earnings ratio for the portfolio is 14.9 and its average earnings growth rate is about 12 percent.

The fund has about 90 stocks and a median market capitalization of $6 billion, versus $20 billion for the S.& P. 500. About 17 percent of the portfolio is invested in financial services, 8 percent in real estate investment trusts, 20 percent in consumer products, 9 percent in capital equipment and 8 percent in energy. ''There's unusually good value in these sectors relative to other sectors,'' he said, adding that he makes big bets away from these areas only when he sees extraordinary values.

Mr. Stromberg, 36, saw the decline in technology stocks in July as an opportunity to look over a dozen or so that might meet his criteria. He bought Hewlett-Packard; Alco Standard, a technology services company, and Analysts International, an outplacement concern for technology services businesses. While the fund held no technology stocks before the decline, he said they were now about 1 percent of his portfolio.

The fund fared relatively well in July in large part because of the absence of technology stocks. This year, through July 31, it had a total return of 5.9 percent, compared with an average of 4.4 percent for its peers, according to Morningstar. With the market rally since then, the fund's return for the year has improved to 9.4 percent, compared with 8 percent for the peer group.

Mr. Stromberg's favorite stocks have something in common -- ''free cash flow,'' or cash beyond what is needed to run a business. It allows the companies to actively acquire smaller businesses, he said.

A Smart Shopper

The fund's largest holding, at 3 percent of assets, is Hubbell Inc., an electrical equipment maker in Orange, Conn. It has had 33 consecutive years of ongoing operating earnings, and Mr. Stromberg said he expected earnings to reach $2.07 a share this year, up 13 percent.

''They are consistent market-share gainers and they use acquisitions to supplement their growth,'' he said. ''We like companies who do smart acquisitions, and Hubbell's track record is outstanding.''

The company is in a restructuring, which Mr. Stromberg said was helping earnings and free cash flow. ''They're making more goods with fewer people and plants,'' he said.

He said he bought Hubbell in late 1993 at a split-adjusted price of $25; it is now at $36.125 a share. That is 18.5 times earnings, compared with the S.& P. 500 ratio of 18.6. The fund's dividend yield is 2.9 percent.

Handy With Profits

Another pick is the Newell Company, a Milwaukee company that makes do-it-yourself hardware, housewares and office products, including Sanford pens and Levolor blinds. The company has significantly outperformed its main competitor in some areas, Rubbermaid, in earnings growth over the last five years, Mr. Stromberg said, adding that he expects earnings of $1.65 a share this year, up 17 percent from last year, and earnings growth of 13 percent to 14 percent in 1997.

''The secret to their success is efficient, low-cost manufacturing, free-cash-flow generation and smart acquisitions,'' he said.

Bought at $21 in 1994, the stock is currently trading at $31.125 and makes up about 1 percent of the fund. Its dividend yield is 1.8 percent and it has a price-earnings ratio of 21.2.

A Cash Cow

Teleflex Inc., of Plymouth Meeting, Pa., makes aerospace and medical equipment, including surgical instruments. It has had impressive revenue, earnings and dividend growth over the last 20 years, and Mr. Stromberg said he expects the company to earn $3.10 a share this year, 12.5 percent more than in 1995. Earnings could grow 11 percent to 13 percent in 1997, he said.

''They have a strong market position and consistent free cash flow,'' he said. ''Every year they generate more cash than they need to run the business. They use the extra to raise dividends and make acquisitions.''

Teleflex's price-earnings ratio is 15.5, and its dividend yield is 1.5 percent. Mr. Stromberg bought the stock in the mid-$30's in early 1995; it is now trading at $46. ''The risk is that the company is sensitive to a slowdown in economic growth,'' he said. ''But their long-term track record of consistent growth shows that they know how to manage through a downturn.''

Photo: In selecting stocks, William J. Stromberg says he uses a ''garp'' approach, for growth at a reasonable price. (Scott Robinson for The New York Times) Graphs: ''Three Favorites'' shows weekly stock prices for Hubbell Inc., Newell Comapny and Teleflex Inc. from 1995 to 1996. (Source: Datastream)